GBForefront LP v. Forefront Management Group LLC
Opinion
This case requires us to consider whether, in assessing diversity-of-citizenship jurisdiction under
Based on the distinction we recognize today between traditional trusts and business trusts, we will vacate the District Court order dismissing this case for lack of jurisdiction. Because the record on appeal is insufficient for us to proceed further, we will remand the case with instructions to determine whether the trusts at issue are of the traditional or business variety and whether there is diversity jurisdiction. We also instruct the District Court to give leave to further amend the complaint within a reasonable time to cure defective jurisdictional allegations.
I. BACKGROUND
Following an investment opportunity gone awry, the details of which are immaterial at this point, GBForefront, L.P., filed suit in the District Court against Forefront Management Group, LLC ("FMG"); Forefront Capital Management, LLC; Forefront Capital Markets, LLC; and Forefront Advisory, LLC, (collectively, the "Defendants") for breach of contract and unjust enrichment. Initially, GBForefront, which is a limited partnership, had sued only FMG, a limited liability company (or "LLC"), and alleged that the Court had diversity jurisdiction under
After years of litigation, GBForefront accepted an offer of judgment made by the Defendants pursuant to Federal Rule of Civil Procedure 68. The District Court accordingly entered judgment in favor of GBForefront and against the Defendants. Later, when a difficulty arose with satisfaction of the judgment, the parties submitted a joint motion to amend the judgment to effectuate a new settlement agreement. Pursuant to the terms of that agreement, GBForefront and the Defendants signed a consent judgment against Forefront Capital Markets, and they agreed that, in the event of any default by the Defendants in satisfying the settlement, GBForefront could immediately file a motion to enter that consent judgment. The District Court granted the joint motion, and everyone thought the case was over.
It was not. GBForefront soon alleged that "[c]ertain Forefront entities" 2 had defaulted on the terms of the settlement agreement, and it thus moved for entry of the consent judgment. (J.A. at 923). With the assistance of new counsel, the Defendants cross-moved to dismiss the case for lack of subject matter jurisdiction, claiming that GBForefront had not adequately pled the citizenship of FMG and that complete diversity was lacking when the lawsuit was initially filed. The parties briefed the issue of diversity jurisdiction, but then came a twist. The Supreme Court issued its opinion in Americold Realty , specifically dealing with the citizenship of trusts.
After holding a hearing and considering the parties' supplemental briefing on the new precedent, the District Court granted the Defendants' motion to dismiss because the Court determined the membership of GBForefront included at least three trusts whose beneficiaries were citizens of New Jersey 3 and FMG also had a member who was a citizen of New Jersey. 4 The Court reasoned that Emerald Investors instructed it not to distinguish between traditional trusts and business trusts for jurisdictional purposes, and that Americold Realty required the citizenship of a business trust to include all its members, including its beneficiaries.
GBForefront timely appealed the dismissal.
II. DISCUSSION 5
On appeal, GBForefront argues that the Americold Realty holding described by the District Court applies only to business trusts, while the trusts composing GBForefront are traditional trusts whose citizenship is based only on the citizenship of their trustees. The Defendants of course disagree, asserting that Americold Realty requires that the citizenship of trust beneficiaries always be accounted for when determining diversity jurisdiction. The Defendants further assert that GBForefront comprises a series of trusts whose beneficiaries' citizenship prevents subject matter jurisdiction based on diversity. The resolution of this jurisdictional dispute accordingly turns on the Supreme Court's Americold Realty opinion. In our view, that case instructs that, for purposes of diversity jurisdiction, the citizenship of a traditional trust must be determined by the citizenship of its trustee alone. 6
A. General Principles of Diversity Jurisdiction
It is fundamental that federal courts must have subject matter jurisdiction before reaching the merits of a case, and, as its name indicates, jurisdiction based on diversity of citizenship requires that opposing parties be citizens of diverse states.
Zambelli Fireworks Mfg. Co. v. Wood
,
Most rules for determining the citizenship of natural persons and business entities are well-established.
Zambelli Fireworks
,
When a party raises an issue regarding a jurisdictional defect, courts must determine whether the challenge is a facial attack or a factual attack.
Constitution Party of Pa. v. Aichele
,
"A factual attack, on the other hand, is an argument that there is no subject matter jurisdiction because the facts of the case ... do not support the asserted jurisdiction."
The Defendants here mounted both a facial challenge and a factual challenge to GBForefront's assertion of diversity jurisdiction.
B. Facial Challenge To Diversity Jurisdiction
In the District Court, the Defendants' facial challenge was "that GBForefront never alleged the citizenship of the members of the LLC defendant entities" in its complaint. (J.A. at 6.) The Court recognized that issue but did not resolve it because the Court concluded that diversity jurisdiction was lacking based on the Defendants' factual challenge. 8 On appeal, the parties have not addressed the facial challenge at all. We nevertheless have an independent obligation to address it.
The Defendants are indeed correct that GBForefront failed to plead the citizenship of FMG's members. It failed even to plead its own citizenship. Instead, GBForefront, a limited partnership, alleged that Warren Weiner, who was the sole member of the general partner of GBForefront and also the sole member of the general partner of the limited partner of GBForefront, was a "resident" of Pennsylvania and that "none of [FMG's] members are residents of Pennsylvania"; nothing is mentioned about citizenship.
9
(J.A. at 719-20);
see supra
note 1. Alleging residency alone is insufficient to plead diversity of citizenship,
McNair v. Synapse Grp. Inc.
,
The clear pleading problem here may be amenable to easy solution. "Defective allegations of jurisdiction may be amended, upon terms, in the trial or appellate courts."
GBForefront's diversity allegations appear to be nothing more than inartful drafting on a technical point, albeit a serious one. Accordingly, because the factual record on appeal is insufficient for us to determine whether complete diversity existed when the complaint was filed,
see infra
Section II.C, we instruct the District Court to give GBForefront the opportunity pursuant to
C. Factual Challenge To Diversity Jurisdiction
We turn next to the Defendants' factual challenge to diversity jurisdiction, which is simply that complete diversity was lacking when the lawsuit was filed.
When a business entity consists of constituent parts that are also business forms, the inquiry into jurisdictional citizenship "can become quite complicated. ... [T]he citizenship of unincorporated associations must be traced through however many layers of partners or members there may be."
Lincoln Benefit Life Co.
,
1. Jurisdictional Citizenship When A Trust Is Involved In A Lawsuit
Through a progression of cases, the Supreme Court has established three rules for determining jurisdictional citizenship when a trust is involved in a lawsuit.
First, in
Navarro Savings Association v. Lee
,
Second, in
Carden v. Arkoma Associates
,
Finally, in
Americold Realty
, the Supreme Court decided that the citizenship of a business trust includes the citizenship of all its members.
Citing our decision in
Emerald Investors Trust v. Gaunt Parsippany Partners
,
confusion regarding the citizenship of a trust is understandable and widely shared. See Emerald Investors ... (discussing various approaches among the Circuits). The confusion can be explained, perhaps, by tradition. Traditionally, a trust was not considered a distinct legal entity, but a "fiduciary relationship" between multiple people. Such a relationship was not a thing that could be haled into court; legal proceedings involving a trust were brought by or against the trustees in their own name. And when a trustee files a lawsuit or is sued in her own name, her citizenship is all that matters for diversity purposes. Navarro ,446 U.S., at 462-466 .... For a traditional trust, therefore, there is no need to determine its membership, as would be true if the trust, as an entity, were sued.
Many States, however, have applied the "trust" label to a variety of unincorporated entities that have little in common with this traditional template. Maryland, for example, treats a real estate investment trust as a "separate legal entity" that itself can sue or be sued. So long as such an entity is unincorporated, we apply our "oft-repeated rule" that it possesses the citizenship of all its members. Carden ,494 U.S., at 195 , .... But neither this rule nor Navarro limits an entity's membership to its trustees just because the entity happens to call itself a trust.
While there has been some question about what the Court meant when it said, "[f]or a traditional trust, therefore, there is no need to determine its membership, as would be true if the trust, as an entity, were sued,"
11
one thing seems clear: the
Court was declaring that, because a business trust is an artificial legal entity and a traditional trust is not, the citizenship of a traditional trust must be determined differently than that of a business trust.
12
That interpretation of
Americold Realty
is consistent with the larger context of the Court's opinion, which focuses on the distinction between traditional trusts and business trusts, while a contrary reading is not. It would be inconsistent with
Americold Realty
to say, as the Defendants urge here, that a traditional trust cannot be brought into court but nevertheless can sue or be sued as an entity.
Wang
,
In sum, following the clarification in
Americold Realty
, the citizenship of a traditional trust is only that of its trustee, while that of a business entity called a trust is that of its constituent owners.
Americold Realty
thus effectively abrogates our conclusion in
Emerald Investors
that traditional and business trusts need not be treated differently when determining citizenship for diversity jurisdiction.
Emerald Investors
,
Americold Realty , necessarily changes that conclusion. As already explained, it instructs that there is a difference of jurisdictional significance between traditional trusts-which embody a fiduciary relationship-and business trusts-which, though they bear the "trust" name, are unincorporated business entities. Given the Supreme Court's analysis, we now recognize the abrogation of that part of our holding in Emerald Investors that treated the analysis of the jurisdictional citizenship of business trusts the same as that of traditional trusts.
2. Distinguishing Between Traditional And Business Trusts In This Case
The remaining question is how to distinguish between traditional and business trusts. The primary point of distinction is, again, in light of
Americold Realty
, that a traditional trust exists as a fiduciary relationship and not as a distinct legal entity.
There are thus at least two inquiries a court should undertake when deciding whether, for diversity purposes, a trust is of the "traditional" or "business" variety. First, the court ought to look to the law of the state where the trust was formed to determine whether the trust has the status of a juridical person.
Raymond Loubier
,
The second, and closely related, inquiry the court should make focuses on the purpose of the trust-a traditional trust facilitates a donative transfer,
Wang
,
Here, the Defendants argue that, even if the trusts at issue were traditional trusts, we should still look to their beneficiaries to determine diversity because of the trusts' positioning within the layers of GBForefront's ownership structure. The Defendants point out that the trusts did not initiate the lawsuit, and rather are relevant only for jurisdictional purposes because they are limited partners of a limited partnership that in turn is a limited partner of the partnership that actually initiated the lawsuit. See supra note 1 (describing GBForefront's ownership structure). According to the Defendants, Americold Realty , Carden , and Navarro can be distinguished as applying only when the trust or trustee was the party that sued or was sued. Thus, they argue, the trust entities are involved in the lawsuit through the layers of GBForefront's ownership structure, so their beneficiaries are necessarily involved too. We disagree.
The rules for determining citizenship do not change depending on whether a trust is embedded within another business entity.
See
Lincoln Benefit Life Co.
,
Unfortunately, the record on appeal is insufficient for us to apply that rule to resolve the Defendants' factual challenge to diversity jurisdiction in this case. In particular, the record is insufficient because GBForefront comprised five trusts but the record only contains the trust instrument for one of them. We must, therefore, remand to the District Court with instructions for it to determine, based on the foregoing guidance, whether the trusts at issue are traditional or business trusts and thus whether there is diversity jurisdiction. 14
III. CONCLUSION
Accordingly, we will vacate the District Court order dismissing the case for lack of diversity jurisdiction and remand for further proceedings consistent with this opinion.
The pertinent language of
The operative pleading is the first amended complaint. In that complaint, GBForefront refers to a "principal" of both GBForefront General, LLC, and WFP2, LP. (J.A. at 720.) But in its initial complaint, GBForefront referred to a "member" of those entities. (J.A. at 50.) We understand GBForefront to be referring to the sole member of GBForefront's general partner, GBForefront General, LLC, and to the sole member of Weiner 2 General LLC, the general partner of GBForefront's limited partner WFP2, LP.
At the time the complaint was filed, GBForefront, L.P., was a limited partnership composed of a general partner, GBForefront General, LLC, and a limited partner, WPF2, LP. The sole member of GBForefront General was Warren Weiner, alleged to be a resident of Pennsylvania. Limited partner WPF2 itself was a limited partnership composed of a general partner, Weiner 2 General LLC, and a series of five trusts as limited partners. The sole member of Weiner 2 General LLC was Warren Weiner. Those trusts were established for each of Warren Weiner's five grandchildren with Warren Weiner designated as the trustee of each trust. At least three of those grandchildren lived in New Jersey at the time the complaint was filed.
As the District Court noted, it is unclear which entities GBForefront was referring to.
See supra n.1.
GBForefront did not plead the citizenship of the beneficiaries and member in its complaint. See infra Section II.B. The District Court said that the parties had agreed at the hearing to those factual statements regarding the parties' citizenship. But nothing was said or agreed upon at the hearing regarding the citizenship of Warren Weiner, the trustee of several of the trusts at issue. See supra n.1.
The parties dispute whether the District Court had jurisdiction. GBForefront maintains that the District Court had jurisdiction under
For simplicity, we express our holding in the singular with respect to the trustee, but, of course, nothing in our decision here limits the number of trustees or beneficiaries that a trust may have. "Obviously[,] if there are more trustees or beneficiaries[,] then the [rule] is applied to all the trustees and beneficiaries."
Emerald Investors
,
Section 1332(a) provides, in relevant part: "The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between ... citizens of different States ...."
Although the District Court said that it was addressing a "facial attack[,]" the Court's analysis actually addressed the Defendants' factual attack because the Court considered information outside the pleadings, as agreed to by the parties (J.A. at 8). The factual attack ultimately came down to a question of law on how to determine the citizenship of certain trusts.
In addition to not pleading citizenship, we also notice that the complaint lacks any reference to the identities of the limited partners of WFP2, which was the limited partner of GBForefront. Other evidence in the record on appeal indicates that the limited partners of WFP2 were five trusts and that Warren Weiner was the trustee of each of those trusts.
In addition to alleging citizenship, not residency, the amended complaint must add the identities and citizenship of the limited partners of WFP2, which, if trusts, must also include their trustees. If such amendment would destroy diversity, the complaint must be dismissed.
"For example, does the phrase mean that there is no need to determine entity membership for diversity purposes when a 'traditional trust' is sued as an entity? Or do we read the statement to mean that a trust sued as an entity must prove entity membership because it is a separate legal person from the individual trustees?"
Zoroastrian Ctr. & Darb-E-Mehr of Metro. Wash., D.C. v. Rustam Guiv Found. of N.Y.
,
Even before
Americold Realty
, the law distinguished between traditional and business trusts in general and for purposes of tax treatment,
see
Restatement (Second) of Trusts § 1 cmt. b (1959) ("[A] trust as a device for carrying on business is not within the scope of the Restatement of this Subject. ... The business trust is a special kind of business association and can best be dealt with in connection with other business associations.");
see also
Morrissey v. Comm'r
,
The Second Restatement of Trusts describes traditional rather than business trusts. Restatement (Second) of Trusts § 1 cmt. b (1959) (explaining the scope of the Second Restatement of Trusts); see supra n.12. It defines a "trust" as "a fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it." Restatement (Second) of Trusts § 2 (1959).
Other arguments that GBForefront raised on appeal are moot in light of our holding.
Reference
- Full Case Name
- GBFOREFRONT, L.P., Appellant v. FOREFRONT MANAGEMENT GROUP, LLC; Forefront Capital Management, LLC ; Forefront Capital Markets, LLC ; Forefront Advisory, LLC ; Penny Weiner; Geoffrey Block
- Cited By
- 193 cases
- Status
- Published